Monday, January 14, 2013

How to Shop For a Mortgage

How to Shop For a Mortgage

After hitting record lows of 3.94% with 0.8 points the week of October 3, rates rose and have been hovering .25% to .375% higher than that.

A primary reason rates rose is market optimism about Eurozone leaders acting more forcefully to contain problems with insolvent member nations like Greece. Eurozone issues are also a big reason rates got so low. Here's why:

If one or more Eurozone nations defaulted on their debts, European and U.S. banks would both suffer and it could lead to market turmoil on the level we saw in 2008. These concerns have driven global investors into safer bets like U.S. mortgage bonds, and rates fall when bond prices rise on this buying. This extreme volatility won’t stop as the Eurozone crisis plays out in the coming weeks and months. Rates trade in realtime and react to each little development. This is why it's rates will likely touch early-October lows again. But these lows come and go in minutes during specific trading intervals each trading day. And this kind of volatility drastically changes the way consumers should shop for a mortgage. Because markets move up and down so fast right now, the rates you see in mainstream media* headlines are long gone by the time you can do anything about it.

So here’s how to shop for a mortgage in this new world.

Shop For Loan Agents, Not Rates

Every consumer shops for mortgages and they should. But this is the critical distinction: you should be shopping for the best mortgage advisor. If you have that, you’ll get the best rate.

Here’s what happens when shoppers focused only on rate get quoted by a good loan agent: Loan agent quotes a rate only after they've analyzed the client's entire financial profile and analyzed their home’s value and condition—also known as pre-approving them. The client will either tire of the pre-approval analytics or be unhappy with the rate and go somewhere else. Then 80% of those cases come back to that loan agent because the competing rate quote was revealed to be incorrect when the other lender actually completed the client’s profile, or the home’s value/condition made the loan ineligible.

Mortgages are extremely competitive so rates and fees are generally the same with most (established, credible) lending firms. What’s not the same lender to lender is the loan agent’s ability to: (1) advise properly, (2) analyze borrower and property profiles, and (3) close with no surprises. So shop to find the lender and loan agent you feel most confident can perform on these three things. Then work with that loan agent to pick a rate target you can’t or won’t go above, and give them a standing order to lock when they see it.

These guidelines are for refinancers. For homebuyers, you can’t lock a rate until you’re in contract to buy a home, but once you’re in contract, the same approach applies.

Rate TargetingTheir are two reasons for the pre-approval and rate targeting tactics discussed above:

(1) A rate quote that flies through the air means nothing. If a loan agent doesn’t issue you written terms after obtaining a full profile on you and your home, then you haven’t received a quote you can count on.

(2) Rate lows are here and gone in minutes each trading day as mortgage bonds rise and fall on economic and technical trading signals. So if you don't first get pre-approved then set a rate target with a standing lock order, it's nearly impossible to hit the lows AND close with no surprises.

Your loan agent also must be able to brief you daily or weekly on the market outlook, so if you're not sensing market competence from your agent, then keep shopping. A loan agent must have a strong read on what's impacting the rate market ups and downs to deliver you the best terms. And for further reference about the loan process, here's another must-read: Refi Roadmap: A Locked Rate Isn't A Closed Loan

*Mainstream media is almost always off the mark on rate data and commentary. Conversely, Mortgage News Daily strives to provide accurate and realistic rate data and commentary daily. Still, the premise of this piece is to explain what a mortgage consumer must do to manage extreme rate volatility.

Julian Hebron is San Francisco branch manager and a top producer for RPM Mortgage and also runs mortgage and housing blog The Basis Point.